The Proof Will Be in the Pudding

By Mitchell Clark, B.Comm. Published : September 18, 2009

— by Mitchell Clark, B. Comm.

If timing is everything in stock market investing, then those investors who were buyers in March should be happy — very happy. Of course, this only applies to new positions. Most investors also lost a lot of money when the stock market collapsed. The broader market still has to appreciate another 50% from current levels just to get back to where it was before prices started to deteriorate.

Current trading action continues to be positive and, with third-quarter earnings season just around the corner, the action could be amplified or knocked out.

Second-quarter earnings were actually pretty decent all things considered and it’s my best guess that third-quarter numbers will be equally decent. This means that the broader market could run even further. I’ve written a number of times in this column about the Dow mirroring effect and, as odd as it seems, so far, this kind of trading action is playing itself out. If it continues, the Dow would be poised to appreciate to the 11,000 level. Of course this is all unscientific speculation, but the charts don’t lie.

In my mind, the stock market’s performance of late has been very impressive. Very soon, however, the market will need to see the proof within the pudding. If both top- and bottom-line growth don’t appear in third-quarter numbers, then a full stock market correction is in order.

I repeat my view that I don’t think the current environment is a good time to be taking on new positions. Just because the broader market is advancing is no reason to be a buyer. At the very least, I’d wait until we get a look at the latest quarterly numbers before considering new equity positions.

Hindsight is always perfect and this past March was seemingly one of the greatest buying opportunities of all time for equity investors. Even the most conservative and unloved large-cap stocks have appreciated significantly over the past months. We haven’t had a decent stock market consolidation since the March low and we’re due for one. Any major pullback in stock prices going forward would be a great buying opportunity. Earnings can easily accelerate with only a slight improvement in revenues. The outlook is good, but investment risk remains high.